ACCOUNTANT EXPLAINS: Should You Buy, Lease or Finance a New Car

Summary

This video explores the financial implications of different car ownership options: buying outright, financing (higher purchase), leasing, and Personal Contract Purchase (PCP). It compares the total cost of each method using a medium-sized family car example, with a 15% deposit over a three-year term. The analysis reveals that leasing can be cheaper in the short term, while buying outright might be more cost-effective in the long run. The video also discusses the psychological factors and opportunity costs associated with each choice, advising viewers to consider their personal circumstances, such as the length of time they keep cars and their investment options, before deciding.

Takeaways

• 🚗 The debate between buying and leasing a car is significant, with each option having its own advantages and disadvantages.
• 🏦 Buying a car outright means paying the full price upfront, avoiding any future payments or interest.
• 📈 Financing a car, known as hire purchase in the UK, involves a deposit, borrowing the remainder at a set interest rate, and making monthly payments over an agreed period.
• 📝 Leasing a car is akin to renting, with lower monthly payments calculated based on the car's depreciation during the lease term, not its full value.
• 🔢 Personal Contract Purchase (PCP) involves setting a term, making a deposit, and agreeing on a final value for the car at the end of the term, with options to keep, return, or part-exchange the car.
• 💰 An analysis using a medium-sized family car as an example shows that the total cost of ownership can vary significantly between buying outright, financing, leasing, and PCP.
• 📉 The current high secondhand car prices may not be sustainable, suggesting that future resale values could be lower than current market comparables.
• 📈 The lease option is often cheaper monthly but does not provide ownership, and the end-of-term buyout price is not guaranteed.
• 🚘 PCP is popular and lucrative for dealerships, but it may not always be the most cost-effective option for consumers.
• 💡 The decision to buy or lease should consider total cost, opportunity cost, psychological factors, and individual circumstances such as how long one plans to keep the car.
• 🤔 The video encourages viewers to consider their personal financial situation and preferences when deciding the best way to purchase a car.

Q & A

What are the four main ways to purchase a car mentioned in the script?

The four main ways to purchase a car mentioned are: buying the car outright, financing (higher purchase), leasing, and Personal Contract Purchase (PCP).

What does it mean to buy a car outright?

Buying a car outright means paying the full price of the car upfront and not having to worry about any further payments or interest.

How does the higher purchase financing option work?

In the higher purchase financing option, a deposit is paid towards the car, and the remaining amount is borrowed at a set interest rate for an agreed period. Monthly repayments are made over this period, and at the end, the car is owned outright.

What is the difference between financing and leasing a car?

Financing a car involves paying off the full value of the car with interest over an agreed period, after which you own the car. Leasing is like renting, where you make monthly payments to use the car, and at the end of the contract, you return the car. The payments for leasing are calculated on a portion of the car's value that depreciates during the lease term.

What is a Personal Contract Purchase (PCP) and how does it work?

A Personal Contract Purchase (PCP) involves setting a term for the agreement, paying a deposit, and agreeing on a final value for the car at the end of the term. The loan amount and monthly payments are calculated by subtracting the deposit and final value from the car's cost. At the end of the contract, you can choose to keep the car by paying the final value, return the car, or use the final value to part exchange the car.

What factors were considered in the financial analysis of the different car purchase options?

The financial analysis considered factors such as the deposit amount, interest rate, monthly payments, total cost over the contract period, and the potential resale value of the car after the contract ends.

Why might a dealership push a customer towards a PCP option?

A dealership might push a customer towards a PCP option because it is the most lucrative for them. It encourages customers to stay with the dealership, upgrade their car, and part exchange it, thus generating ongoing revenue for the dealership.

What is the potential downside of leasing a car?

The potential downside of leasing a car is that at the end of the contract, you do not own the car and must return it. Additionally, there may be costs associated with wear and tear or exceeding mileage limits.

What is the opportunity cost of buying a car outright?

The opportunity cost of buying a car outright is the potential return you could have earned by investing the money elsewhere, such as in the stock market or other cash-generating assets.

What psychological factors are mentioned in the script that could influence the decision to buy, lease, or finance a car?

Psychological factors mentioned include the desire for full ownership and the freedom to do what you want with the car, the stress of monthly payments, the appeal of driving a newer car, and the concern about future car maintenance costs and resale value.

What advice does the script give for making a decision on how to purchase a car?

The script advises to consider the total cost of each option, the potential resale value of the car, opportunity costs, and personal preferences such as the desire for new cars, the stress of monthly payments, and the need for flexibility.